The Association of Certified Fraud Examiners (“ACFE”) has published its 2022 Report to the Nations on Occupational Fraud and Abuse. The latest biennial study breaks down white collar crimes by industry, highlighting the common scams that manufacturers need to watch for and ways for them to minimize potential losses from fraud.
How much does fraud cost?
The ACFE estimates that the annual cost of fraud globally is roughly $4.7 trillion, based on data compiled from 2,110 real cases of fraud investigated in 133 countries, which totaled $3.6 billion in losses, with an average loss per case of $1.78 million. That’s a significant amount of money, but what hits closer to home is how much fraud affects individual victim organizations.
The median loss worldwide caused by the frauds was $117,000. Even more disheartening is the median loss for manufacturers of $177,000. However, median loss for organizations with fewer than 100 employees was $150,000. The largest fraud losses were due to dishonest owners and executives with a median loss of $337,000.
Which fraud schemes are most common?
The ACFE breaks down its findings by industry, and manufacturing ranks eighth in terms of the frequency of fraud cases. The most common fraud schemes reported by manufacturers include:
- Corruption. More than half of manufacturers in the study (59%) fell victim to these scams. Corruption includes bribery, illegal gratuities and economic extortion.
- Billing scams. About one-fourth of fraud cases (26%) involved billing ploys either with customers or vendors. These scams may include submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.
- Noncash theft. Rounding out the top three categories, noncash ploys were reported in more than 23% of fraud cases. These incidents often involve theft of such valuable assets as inventory and equipment.
In addition, to these schemes manufacturing fraud cases also involved financial statement fraud (12%), expense reimbursements (10%) and payroll (10%). Many fraudsters test the waters with entry-level scams such as asset misappropriation which is the most common type of fraud across all sectors but the least costly at a median loss of $100,000. Then they graduate to bolder schemes such as financial statement fraud with is the least common across all sectors but the most expensive at a median loss of $593,000.
How can manufacturers fight fraud?
U.S. businesses lose millions of dollars to white-collar criminals every year. The manufacturing sector is especially vulnerable to fraud schemes involving corruption, billing, and noncash assets, such as theft of inventory and equipment. Compare your organization’s fraud risks by industry, region and size. Benchmark your anti-fraud efforts against similar organizations and against the most effective methods for reducing fraud losses.
Fraud prevention and detection measures don’t necessarily have to be expensive to be effective. According to the ACFE, the anti-fraud controls that offer the highest potential return on investment — that is, offer the biggest reduction in comparative median fraud losses — are as follows.
- Background checks are an important tool in the fight against fraud. This includes not just employee background checks, but vendors as well by implementing a control process to bring on new vendors as they can prevent organizations from hiring individuals and bring on vendors with known histories of misconduct.
- Internal controls were the most common weakness amongst all organizations that experienced fraud. Lack of internal controls accounted for 29% of cases and an override of existing controls accounted for 20% of cases. Example would be to implement job rotations and mandatory vacation policy.
- Management review was the most common change made after a fraud occurred with 75% of victim organizations modifying their anti-fraud controls. Involvement of upper management in review of financial statements, time and expenses reports,
- Data monitoring and analysis techniques were the second most common change made after a fraud occurred with 64% of victim organizations modifying their anti-fraud controls.
Research suggests that businesses that provide a convenient and confidential way for employees to report unethical behavior are more likely to unearth embezzlement and other wrongdoing sooner and suffer smaller losses than those without established “whistleblower” policies.
Across the board, the presence of anti-fraud controls was correlated with lower losses and quicker fraud detection. More specifically, 42% of frauds were detected by tips, which is nearly three times as many cases as the next most common method. More than half of the tips came from employees with email (40%) and web-based forms (33%) reporting higher than a telephone hotline (27%).
Employees are more likely to report fraud if the company acts on tips in a prompt, serious manner and demonstrates a zero-tolerance policy for fraud. The most serious allegations should be reviewed with legal counsel first. Often timely follow-up necessitates the use of an outside forensic accounting specialist who is trained in collecting a thorough and defensible trail of evidence.
How should victims handle fraud allegations?
Many of the fraud victims in the ACFE study haven’t yet recovered a dime from the perpetrators. Many worry that prosecuting criminals could lead to bad publicity. Others prefer to just fire the wrongdoers and then focus on recovery, rather than spend time and resources pursuing a financial settlement or conviction.
Prosecuting fraud may be worthwhile for several reasons, however. It sends a message to would-be thieves that management has adopted a zero-tolerance policy, thereby deterring future crimes. In addition, a conviction will be reported on the fraudster’s permanent record, which may prevent him or her from striking other victims in the future. If you suspect fraud, contact your attorney or a forensic accountant for help deciding how to proceed.
The sooner you can act upon discovery, the better you can protect yourself and the company. The Commodity Futures Trading Commission (“CFTC”) recommends these six steps to take after discovering fraud to prevent further theft.
- Don’t pay any more money
- Collect all the pertinent information and documents
- Protect your identity and accounts by contacting banks to put holds on accounts
- Report the fraud to authorities
- Check your insurance coverage, and other financial recovery steps
- Consider changing behaviors and building your resistance to fraud
How can LBMC help?
Over half of the cases analyzed in the 2022 report were determined to have occurred due to lack of adequate controls. The ACFE report to the nations is an important reminder to ensure your organization is constantly assessing its fraud risk and updating its controls to keep pace with the evolving world of fraud.
If you organization fell victim to fraud or want to proactively combat the potential for fraud in your organization, LBMC has the resources and experience to help.
- We can help by reviewing the current control environment and perform an assessment of controls based.
- We can work with management and provide suggestions on improving or implementing controls around preventing and detecting fraud. A bonus for some organizations is the implementation of these type of controls could reduce year-end audit procedures needed and possibly even reduce year-end audit fees.